May Core sector tempers to +16.8% but COVID 2.0 impact still visible

Core sector growth for Apr-21 may have been at an all-time high due to the base effect, but the month of May-21 saw more tempered growth. At +16.8%, the core sector growth of 8 infrastructure segments still look magnificently hyperactive.

Jul 01, 2021 10:07 IST India Infoline News Service

Core sector growth for Apr-21 may have been at an all-time high due to the base effect, but the month of May-21 saw more tempered growth. At +16.8%, the core sector growth of 8 infrastructure segments still look magnificently hyperactive. But that is more due to the base effect and that effect should gradually wane over the next few months. However, the message of the core sector data is that COVID 2.0 impact is still visible in the month of May 2021, despite efforts to get the economy back on track.

Upgrades still favour core sector numbers

The base effect magnified core sector growth in Apr-21 and that is the story in May-21 too, albeit to a lesser extent. That is not surprising because growth fell by -21.4% in May-20. A 16.8% bounce from that level does not even bring you back to baseline. The good news is that core sector upgrades are still favourable. Apr-21 core sector growth was upgraded from 56.1% to 60.9%. Similarly, the Feb-21 core sector growth also got upgraded from -4.6% to -3.3%. From that perspective, May-21 could see upgrades too.

Data Source: DPIIT (Department for Promotion of Industry and Internal Trade)

With 2 months of data for the new fiscal, we have the first reliable estimates of indicative core sector growth. For Apr-May 2021, the core sector cumulative growth stood at 35.8% on yoy basis. Out of the 8 core sectors, only 2 sectors viz. crude oil and fertilizers showed negative growth in FY22. Of the remaining 6 sectors, steel and cement flattered with over 100% growth in the first 2 months of FY22.

COVID 2.0 impact is still visible on core sector

Last month we saw that April showed distinct impact of COVID 2.0 on core sector performance. That continues in May-21 too, although the impact is less pronounced compared to Apr-21. To understand the COVID 2.0 story, you need to look at the sequential numbers i.e., month-on-month. In fact, to get a better picture, we look at May over April and May over March. That smoothens the base effect and give a granular picture of the impact of COVID 2.0 on core sector.

For example, the sequential growth in core sector for May-21 over April-21 is -3.75%. If you want to assess the full impact of COVID 2.0, then the contraction in core sector of May-21 over Mar-21 has been a deep -15.68%. That is a more realistic estimate of the damage to core sector caused by the COVID 2.0 pandemic impact.

How the 8 core sectors fared; yoy and sequentially

On a yoy basis, 6 out of the 8 core sectors showed positive growth with crude oil and fertilizers showing negative growth on a yoy basis. However, on a sequential month-on-month basis, 5 out of the 8 sectors showed negative growth while the COVID-2.0 impact was negative on 6 out of the 8 sectors. The table below captures the gist of this dichotomy.
Core Sector Component YOY over May-20 (%) MOM over Apr-21 (%) COVID 2.0 Impact (%)
Coal +6.9% +3.1% -44.3%
Crude Oil -6.3% -2.2% -6.8%
Natural Gas +20.1% +3.0% +1.9%
Refinery Products +15.3% -4.6% -12.4%
Fertilizers -9.6% +16.1% +12.3%
Steel +59.3% -0.4% -9.5%
Cement +7.9% -17.6% -26.4%
Electricity +7.3% -7.1% -10.2%
Overall Core Sector Growth +16.8% -3.7% -15.7%
Data Source: DPIIT

The above table looks at the picture of core sector growth on a yoy basis as well as sequentially over April and March. The idea of a COVID 2.0 impact (2 month perspective) is to understand the full impact of COVID 2.0. Two things are evident from the above table and that should serve as an important data point for the policy makers. Firstly, if you look at sectors like coal, refinery products, steel, cement and electricity, the COVID 2.0 impact appears to be quite negative based on 2-month core sector data. Secondly, the recovery in May appears to be marginal at best and even that recovery has been led by Fertilizers, natural gas and coal. Hopefully, the COVID stimulus fourth tranche, should help to ease the pressure on core sector and put core sector back on growth path.

FY22 core sector starts with a bang, thanks to base effect

Core sector with a 40.27% weight in IIP needs to provide the much-needed impetus if Indian economy has to offset the lost quarter of Jun-21.

Year 2012-13 2013-14 2014-15 2015-16
Core Sector Growth (%) 3.8% 2.6% 4.9% 3.0%
Year 2016-17 2017-18 2018-19 2019-20
Core Sector Growth (%) 4.8% 4.3% 4.4% 0.4%
Year 2020-21 Apr-Mar FY22
Core Sector Growth (%) -6.5% 35.8%
Data Source: DPIIT

The core sector growth for fiscal year FY22 has tapered from 56.1% to 35.8%. However, that is still a lot of base effect. The government has taken the initiative with its fourth round of stimulus. The ball, in a way, is now in the court of corporate India to take it further.

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